(COMTEX) B: RILEY REPORT: HAVE THE 'NETS FINALLY TOPPED?
B: RILEY REPORT: HAVE THE 'NETS FINALLY TOPPED?
HOUSTON, July 12 /PRNewswire/ -- Have the 'nets finally topped? That
is clearly the question of the week for many technology investors, hot
money traders, and short sellers. After putting in phenomenal
asymptotic runs that remind many Wall Street veterans of the left side
of the vertigo-inducing parabolic price spikes in everything from
mobile home stocks in the late Sixties to casinos and biotechs in the
early Nineties, many pros are now betting that the Internet stocks have
begun their descent down the right side from their apexes.
The pros see many signs that embolden them to make such a bet. From a
technical analysis perspective, many of the names that ran the farthest
and fastest do indeed appear to have put in classic blowoff tops, with
climactic buying panic volume spikes that correspond with tops in
price. Lycos' (Nasdaq: LCOS) daily chart offers the best textbook
illustration of this pattern, making a new intraday price high on July
7 while trading a record level of daily volume that was more than
double that of its previous daily volume spikes of approximately four
million shares during April through June.
But Yahoo! (Nasdaq: YHOO) is surely the 'net bears favorite poster boy,
having (so far) failed to scale its July 7 intraday high of $207 1/2,
even after reporting blowout earnings that handily trounced even the
loudest whisper number. Even better for the bears, Yahoo!'s
announcement of a prudent two for one stock split (probably intended to
preserve the stock's triple- digit stock price and institutional
cachet) could not work that old black magic and ramp the stock. You
can almost sense their fervent hope that the stock will break below its
July 8 intraday low and plummet as scripted. After all, who wouldn't
want to the nail the top tick of "Tulipmania"?
The 'nets also look a little toppy from a fundamental perspective.
With YHOO trading at more than 37 times his estimate of 1999 revenues,
Hambrecht & Quist analyst Paul Noglows decided to cut his rating on the
stock from a "Buy" to a "Hold", even while raising his estimates. In a
July 10 column in TheStreet.com, Mr. Noglows explained his downgrade
was due to concerns that the company's current valuation had
disconnected from the company's underlying near term business prospects
due to a "Las Vegas" gambling mentality on the part of investors. And
even fee-loving investment bankers are probably wondering how they can
still pitch more portal/media deals at these prices. Perhaps Yahoo!
should use its gilt-edged currency to make its own bid for an old-line
media company.
So, back to the question -- have the 'nets finally topped? I think the
real answer to that question is that it is a meaningless question. But
I posed it to illustrate that it is as meaningless a question as is
asking if "technology" stocks had finally topped once it was clear that
the sub-$1,000 PC and overcapacity were going to (temporarily, anyway)
crush the semiconductor industry. Any technology portfolio manager who
blew out Dell (Nasdaq: DELL), Microsoft (Nasdaq: MSFT), or Cisco
(Nasdaq: CSCO) at the same time they correctly called the top in Intel
(Nasdaq: INTC) has either bought those names back at higher prices or
is now in another line of work.
Perhaps the better question is: "have the portals topped?" Or: "have
the names that trade at more than 15 times forward estimated revenues
topped?" Perhaps 'net stocks are now undergoing a stratification akin
to the one "technology" stocks underwent in the past few years.
Perhaps it is too simplistic to suggest that the "Internet sector" will
indeed always trade as a monolithic "group".
Some signs of a possible stratification were clearly apparent last week
as some second-tier companies that investors deemed still undervalued
in relation to their future prospects, such as Egghead.com (Nasdaq:
EGGS) and Zapata (NYSE: ZAP), topped or nearly topped the price gainers
and volume leaders lists on the week, even as their blue-blooded
e-commerce and portal brethren languished. While 'net bears will point
to those moves as even more proof of speculative froth, bulls might
decide that the "sector" is beginning to mature to the point that money
may now "rotate" within the sector, rather than necessarily flood
torrentially in or out of it.
Time will tell whether last week's apparent rotation to cheaper second-
tier names was another flash-in-the-pan surge of "Internet Mania" or
the beginning of a true discernment of value and difference within the
sector that goes beyond blindly pouring money into a handful of
first-to-market and marquee brand names. For now I would suggest that
investors remember that the "Internet stocks" are much more than the
household name portal/search engine companies. They are also browser
companies, Internet service providers, e- tailers, content providers,
infrastructure builders, security providers, advertising agencies, and
niches that haven't even been named yet - and all with different
salient measures of growth and valuation.
I will leave you with this thought: if the Internet does indeed
represent one of the most important advances in technology and business
that the world has ever seen, I find it hard to believe that today's
stock prices completely discount the revenue and earnings streams that
lie ahead, or that the top is truly in. -- Louis Riley
The Riley Report is written by Louis Riley, principal of Riley
Capital Research. It will be distributed on an occasional basis to
provide timely commentary and opinion on individual stocks or
industries that are making news. Opinions expressed are subject to
change without notice.
Riley Capital Research is a research boutique that specializes in
highlighting investment opportunities that have frequently been
overlooked by most investors and that are not followed by the majority
of Wall Street sell- side research organizations.
This report should not be construed as a solicitation of any kind.
Neither Riley Capital Research nor any of its affiliates have received
any compensation of any kind from any of the companies mentioned in
this report.
Mr. Riley and affiliates of Riley Capital Research currently hold long
positions in the com-0- 07/12/98 /CONTACT: Louis Riley of
Riley Capital Research, louisriley@aol.com/
(YHOO LCOS DELL MSFT CSCO INTC EGGS ZAP)
CO: Riley Capital Research ST: Texas IN: FIN MLM CPR SU:
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